The IRS is launching a free tax filing pilot program next year

Washington (CNN) The Internal Revenue Service is considering whether to build its own free tax filing system and plans to launch a limited pilot program that will be available to some taxpayers next year during the 2024 tax filing season.

The announcement came on Tuesday when the IRS released a cost-benefit study on developing a free electronic tax filing system.

The report was required by the Inflation Reduction Act, a sweeping tax and climate package that Democrats passed along party lines last year. The IRS gave $15 million to fund a team to conduct the study over nine months.

During this initial research phase, an internal prototype was created to help study how taxpayers would use the software, known as Direct File. Surveys have found that 72% of taxpayers would be interested in using a free electronic tax filing service offered by the IRS.

The report said the cost of running the program could range between $64 million and $249 million annually. The cost can vary widely depending on who will be allowed to use the new tax filing system.

“The report shows that the majority of taxpayers are interested in using a tool provided by the IRS to prepare and file their taxes,” IRS Commissioner Danny Werfel said on a call with reporters.

“This also shows that the IRS is technically capable of direct filing, but doing so requires additional resources and adds complexity to IRS operations,” added Werfel.

The agency has not yet decided who will be eligible for the pilot program. It can be restricted to those under a certain income threshold or those with certain tax statuses.

It will be up to the Treasury Department to decide whether to proceed with a large-scale program after the pilot program runs next year.

There is an existing free preservation service. It is not widely used

Currently, taxpayers who earn $73,000 or less can file their federal tax returns for free. About 70% of taxpayers fall into this category.

But this free file service is not provided by the IRS. Instead, taxpayers must use a service from one of seven different private companies that form an alliance known as the Free Files Program.

The program started in 2002 and has gone through many iterations – but there has always been a low rate of use.

During the 2020 tax year, About 4.2 million taxpayers, or about 4% of those eligible, have used the Free Files program, according to a report from the Government Accountability Office.

Some Democratic lawmakers pushed for a free system run by the IRS, even more so after ProPublica published a series of articles in 2019 that said Private tax filing companies have made it difficult for taxpayers to find their own free filing options.

The largest private providers of tax preparation and filing services Withdrawn From the Free Files Alliance. H&R Block, which left in 2020, and Intuit, which left in 2021, handled about 70% of the proceeds filed through the Free Files program for the 2019 tax year, according to the Congressional Research Service.

TurboTax, which is owned by Intuit, is currently sending checks to approximately 4.4. million people as part of the settlement of a lawsuit that alleged the company turned millions of low-income Americans away from free tax filing services.

But critics of the government-run tax filing program say the IRS should not play the role of both tax preparer and tax collector.

Werfel said Tuesday that the Free Files program will continue to be available to low-income taxpayers next year while the IRS-run pilot program begins.

Comprehensive reform in the IRS

The free federal tax filing program is one of several changes happening at the IRS after it received an influx of funding, totaling $80 billion over a decade, from the Inflation Control Act.

Overall, the funding aims to support the agency in cracking down on tax fraud and better serving taxpayers. As a result of the improvements, the IRS is expected to collect more than $100 billion in new revenue over a 10-year period.

Biden administration officials have repeatedly said that taxpayers making less than $400,000 a year will not face a tax increase because of the new funding, though there is some uncertainty about how the IRS will guarantee that.

Republicans have been critical of sending too much money to the IRS and are skeptical that the investment will not lead to increased audits of hardworking Americans. In the GOP-controlled House of Representatives, a bill passed earlier this year that would eliminate most of the new funding, though it has no chance of becoming law.

The IRS is also working to better serve taxpayers. To date, the agency has hired 5,000 new customer service agents since the Inflation Reduction Act was passed last year.

Werfel said last month that the IRS consistently answers between 80% and 90% of incoming calls, compared to just 17% last year. Waiting time is also reduced. On average, callers wait about four minutes on average, compared to 20 minutes last year.

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